Reflections on The Big Short by Michael Lewis

In The Big Short Michael Lewis tells the story of the financial meltdown of 2007-2008 from the point of view of several people who saw it coming and tried to find ways to profit from it. The story involves complex financial contracts and activities such as asset-backed bonds, collateralized debt obligations (CDOs), credit default swaps, and short selling. Lewis skillfully integrates the explanation of these concepts with his tale of individuals who recognized that bonds backed by subprime mortgages (mortgages made to people with poor credit scores) would fail. As a result, the reader is not overwhelmed with technical details of complex concepts.

After reading how those who bet against the market were vindicated, several messages should remain with readers. The experts and very smart people at the center of this market had no clue as to what would happen even though the end outcome was obvious in hindsight. When those making the loans no longer had to worry about whether the loans would be repaid, the smart people should have recognized that loan originators no longer had an incentive to worry about loan quality, and thus quality would inevitably fall, ultimately resulting in high defaults. Their assumption that housing prices would only rise was reckless. It was not the smart insiders and experts who first recognized that the market was flawed. Outsiders, people often on the fringes of investing, like a California MD with Asperger's syndrome, were the first to understand the situation. Although Lewis does not explore why the insiders were so blind, it seems obvious that group thinking and wishful thinking played huge roles. The insiders had found a way to make vast amounts of money and they wanted to believe that it was sustainable, so they did. Being smart does not immunize one from self deception--rather the hubris of smart people may make them more susceptible.

The pessimists of the story, who were the realists, wanted to bet against subprime mortgage-backed securities, but they struggled to find a way to do so. Eventually they discovered credit default swaps, which in simple terms are insurance policies on bond. As long as the bond is alive, the holder of the insurance policy must pay premiums. When the bond dies or is severely injured, the owner of the policy can collect. One does not need to actually hold the bonds to have an insurance policy on them. Further, it does not seem that this way of "shorting" the market has any corrective effect, unlike in the stock market, where shorting a stock helps drive the price down.

Why were large financial institutions willing to sell these insurance policies? Again, the experts on Wall Street did not realize how risky these bonds were. In part that was because the rating agencies--Moody's, S&P, and Fitch--said they were safe. They rated the bonds based on models, and those models were based on the assumption that pooling assets reduces risk because though some will fail, most will not. That assumption is valid when the performance of assets is uncorrelated, that is, when what happens to one is independent of what happens to others, the way a second coin flip does not depend on the results of a first coin flip. When the assets are correlated, so that they tend to move together, diversification may not reduce risk. The models were flawed and the very smart people on Wall Street gamed them to get alchemy: lead was certified as gold.

When the subprime mortgages finally crashed the world-wide financial markets, those who had bet against the subprime bonds walked away rich. But so too did those who had been originating, packaging, and selling the toxic financial instruments that had wreaked havoc. The U.S. government, fearful of total economic collapse, bailed out poorly run institutions and those who had caused the carnage walked away whole. Lewis does not blame the debacle on a lack of government regulation--if those at the center of the market did not understand what was happening, there is no chance that government bureaucrats would have. Rather he stresses the importance of incentives. When investment banks were organized as partnerships, the partners would suffer huge financial losses if the firm failed, so they worried a great deal about risk. When stockholders own the financial institution, managers have incentives to worry about the short run and not so much about risk and the long run. Top managers can and do walk away from companies that they have ruined with their wealth intact; life is not fair.

The Big Short views the collapse of the market for mortgage-backed securities from a narrow perspective. Yet it is one of the best books I have read on the episode and certainly the most entertaining.

People still respond to incentives

Casey Mulligan is surprised that some economists seem to have forgotten that people respond to incentives, that if you penalize work, you get less of it.

Socialism to our south

The results of socialism in Venezuela are what anyone who understands economics expects, but some citizens still prefer to believe that bad results must come for bad people:

Each day the arrival of a new item at Excelsior Gama brought Venezuelans flooding into the store: for flour, beef, sugar. Store employees and security guards helped themselves to the goods first, clogging the checkout lines, and then had to barricade the doors to hold back the surge at the entrance.
“The store owners are doing this on purpose, to increase sales,” said Marjorie Urdaneta, a government supporter who said she believes Maduro when he accuses businesses of colluding with foreign powers to wage “economic war” against him.
“He should tell the stores: Make these items available — or else,” she said.

Socialism is always in trouble because of sabotage--a favorite theme in the USSR and China under Mao. It is unfortunate that some people cannot understand that people respond to incentives.

Most Venezuelans are too busy just trying to secure the basics. Residents from the country’s interior say the shortages are even worse outside the capital.
“There’s nothing to buy where we live,” said Maria Valencia, a preschool teacher from the oil-producing hub of Maracaibo, near Venezuela’s western border, while shopping at a government-run Bicentenario supermarket where products sold by recently nationalized companies carried little heart symbols and the phrase “Made in Socialism.”
Valencia and three family members had filled their cart with corn oil, four bottles each, the maximum. “This stuff is gold,” she said.
Shoppers here were more inclined to blame the scarcities on badly behaved countrymen whom they said were trying to profit from the situation.

And while the government is trying to run the economy, it is not doing a very good job with a basic function of government:

But if the president’s fiscal policies are anything like his response to rising crime, the country looks to be in trouble.
The Jan. 6 roadside killing of former Miss Venezuela Monica Spear in a botched robbery attempt jolted a country long-numbed by one of the world’s highest homicide rates and near-total criminal impunity. 

In democracy people get the kind of government that they deserve, which may be very different from the kind of government that they want. 

Read the whole thing in the Washington Posts here.

Cut the meat, save the fat

Thomas Sowell describes the perverse incentives of government bureaucrats facing budget cuts much better than I can:

Back in my teaching days, many years ago, one of the things I liked to ask the class to consider was this: Imagine a government agency with only two tasks: (1) building statues of Benedict Arnold and (2) providing life-saving medications to children. If this agency's budget were cut, what would it do?

The answer, of course, is that it would cut back on the medications for children. Why? Because that would be what was most likely to get the budget cuts restored. If they cut back on building statues of Benedict Arnold, people might ask why they were building statues of Benedict Arnold in the first place.

Tombstone: The Great Chinese Famine

When I attended the University of Wisconsin-Madison from 1968 to 1970, I frequently encountered radical leftists who regarded Mao Zedong (or Mao Tse-tung as he was known in those days) as a hero, a great leader with a great intellect. They did not know and would not have believed that a decade earlier Mao's Great Leap Forward had caused the starvation of millions of Chinese peasants. The exact number will never be known, but estimates range from 17 million to more than 50 million.

Tombstone: The Great Chinese Famine, 1958-1962 by Yang Jisheng is a comprehensive examination of this disaster. The author was in high school when he received word that his father was dying of starvation back in his village. He rushed home but found that his father was too far gone to be helped. It would be years before the author came to understand that his father was one of millions of people who died in an unnecessary man-made disaster. His doubts about the infallibility of the Communist leadership began to form during the Cultural Revolution when many high-ranking officials were accused of corruption. Those doubts matured into skepticism when Yang became a reporter and learned how news was manipulated to indoctrinate the masses. Eventually he decided he needed to uncover the truth. His quest for truth led to this book.

The English version of Tombstone is about half as long as the original Chinese version, published in Hong Kong in 2008 and not available in Mainland China, and it also rearranges the material. Most of the detailed, province-by-province accounts of the famine have been eliminated. Remaining are accounts from a few provinces that were especially hard hit and the chapters that analyze the reasons for this disaster. The book would not have been possible if there were not high-level party officials who also believed that the truth needed to be recorded and preserved.

Unlike Chinese famines in the past, this famine was not caused by flooding, drought, or any other natural calamity. It was caused by policies that Mao Zedong set and kept in place. Mao did not intend to starve millions of people. His goal was to stay in power as the new emperor of China and to use his power to establish the utopia that is the goal of faithful Marxists. His utopian beliefs would not have had disastrous consequences if the triumph of the Chinese Communists in 1949 had not ushered in a totalitarian government.

China has a long tradition of authoritarian government and the communists adopted that authoritarianism despite their promises that they would be democratic. Society was organized as a pyramid, with each level a dictator to those below and a slave to those above. The addition of the secular religion of Marxism allowed the Chinese Communists to take the authoritarian system of the emperors to an extreme. Marxism, despite its rhetoric of egalitarianism, is an elitist belief system that confers absolute power on a privileged few. The faithful believe themselves justified in depriving everyone else of freedom and forcing them to blindly follow orders from above because these measures enable the arrival of heaven on earth.

Yang notes that the communist party relied on "'two barrels:' the gun barrel and the pen barrel; seizing and ruling its domaine relied on both." (p 492) The party controlled thought because it controlled all sources of information and also because it punished any deviation from approved thought with severe consequences. When the Communist Party gained control of China, it executed over 700,000 people (p 476) and executions continued after its power was consolidated as a means of control. Although this system of control, reaching down to shape the thoughts of peasants, was impressive, it had two related shortcomings.

Each level of the hierarchy needed to appease the level above it. Failure to meet goals could bring charges of sabotage or right-wing deviation, so there was an incentive to exaggerate what was possible and what had been accomplished. Because telling the truth about production was dangerous, the entire system ended up being based on lies and deceit. Those at the top did not have a clear idea of what was happening at the bottom.

The lack of honesty contributed to a second problem, the lack of corrective mechanisms. One of the advantages of free markets is that they provide powerful correction to those who make products that people do not want. A democracy also has corrective forces, though they are weaker. The citizens can and often do vote incompetent and corrupt officials from office. However, "[i]n trying to control the ears and eyes of ordinary people, the supreme ruler ends up blocking his own ears and eyes" (p 496) and "[i]n a monarchal political system, the supreme ruler hears only voices that conform to his own will." (p 497)

In the Great Leap Forward Mao intended to squeeze peasants to support industrialization. The government based extraction on reported harvests, but because the reports were exaggerated to curry favor with those above, the level of extraction was so high that deaths from starvation began in 1958. The author argues that there was a chance to correct the mistake at the Lushan Conference in July and August of 1959. It was missed when Mao used the conference to attack those who voiced concern over the way that the Great Leap Forward was proceeding, effectively prohibiting true reporting of the conditions in the countryside. As a result, millions more starved from 1959 to 1962.

Mao was blinded not only by bad information but also by ideology. In socialist and Marxist thought private property establishes and perpetuates inequality. Unacknowledged is the role property rights have in overcoming the problem of common ownership of scarce resources. Private property is a mechanism that makes people recognize costs of their actions. Mao enthusiastically supported the suppression of household food preparation in favor of communal kitchens because he thought there would be economies of scale and that large-scale food production would release people to do other things. He never anticipated that people given free food would overconsume, causing many kitchens to run out of food and to shut down in the winter, leaving people hungry. When households prepare their own food they consider that a consequence of eating now may mean less later. With a communal food supply, what one person consumes now has minimal effect on what that person will have later.

Similarly, when cultivating their own land, peasants have a strong incentive to make smart decisions because mistakes often have dire consequences. When decisions about what and how to produce were made high in the hierarchy, the consequences of mistakes were not borne by decision makers but by the peasants. The problem of common ownership is that people are not accountable for the consequences of their actions and as a result there is no barrier to actions that are socially destructive. Mao's Marxist ideology never let him understand why trying to abolish private property in favor of communal ownership led to repeated failures. Fortunately, reality overcame ideology for some in the leadership so that reform was possible after Mao's death.

Yang estimates that at least 36 million people starved to death from 1958 to 1962. In addition, he estimates that the shortfall in births was about 40 million; lack of food reduced births because a large number of women stopped ovulating. However, when the policies of the Great Leap Forward were relaxed after 1962 and food availability rose, births soared and made up for that shortfall.

Eventually knowledge of the scale of this disaster did reach the top. Several high officials were "charged in 1961 with directing each province to compile data on food supply and demographics. The data indicated a population loss of tens of millions. This information was reported to only two people: Premier Zhou Enlai and Mao Zedong. After reading the report, the premier contacted Zhou Boping and told him to destroy it immediately and make sure that no one else saw it." (p 406)

The author named the book Tombstone for four reasons. He wanted it to be a memorial for his father who died in the famine, for the 36 million others who died, and for himself. He also wanted it to mark the grave of the system that brought about this great tragedy.

Tombstone is an important documentation of one of the great calamities of 20th century socialism. It gives details and names names. However, there are so many names in the book that the reader can not make sense of them all. The book describes an event so horrific and large that it is beyond human comprehension. Books that put the event into story form, focusing on how it affected a small group of people, will have a larger audience and a greater impact. There is truth to the quote, often attributed to Stalin, that "the death of one man is a tragedy, the death of millions is a statistic."

Here is the review of the book in the Wall Street Journal and here is one from the New York Review of Books.

Your help is hurting

From an interview in Forbes, "Your Help Is Hurting: How Church Foreign Aid Programs Make Things Worse:"

There’s an author Bob Lupton, who really nails it when he says that when he gave something the first time, there was gratitude; and when he gave something a second time to that same community, there was anticipation; the third time, there was expectation; the fourth time, there was entitlement; and the fifth time, there was dependency. That is what we’ve all experienced when we’ve wanted to do good. Something changes the more we just give hand-out after hand-out. Something that is designed to be a help actually causes harm.

Read the whole thing.

Why Nations Fail: A Review

In Why Nations Fail: The Origins of Power, Prosperity, and Poverty Daron Acemoglu and James Robinson argue that elites promote stasis because change can undermine their positions in society. Elites uses their positions to channel wealth and income to themselves and protect those positions by erecting political and economic structures that keep others from prospering. Acemoglu and Robinson call these structures extractive institutions. In contrast, sustained economic growth must allow the creative destruction that flows from technological change. Only those political and economic institutions that allow participation by outsiders generate the innovations that create sustained economic growth. Acemoglu and Robinson call these structures inclusive institutions. Both extractive and inclusive institutions tend to create forces that perpetuate themselves, which is why it is so hard for poor countries, those with the most extractive institutions, to break away from the status quo and begin the process of growth. The bulk of the book consists of examples that develop and illustrate this theme.

An attraction of this thesis is that it is an extension of the most basic idea in economics, that people respond to incentives. When people have the opportunity to structure incentives to favor themselves, they usually will do so, which is why countries impoverished by elites are so resistant to economic growth. When one tyrant is overthrown, the usurper is usually just another tyrant who wants to use the system to enrich himself and his cronies. The thesis of this book is quite similar to that developed by Hernando De Soto in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, yet De Soto is not included in the bibliography of sources.

The authors dismiss culture as a factor that explains differences in income level. They point out that the North and South Koreans had similar cultures, yet have had completely different growth paths. Yet within countries different cultural groups can have very different levels of success, and sometimes the successful groups are subject to discrimination. Perhaps the authors should have argued that cultural differences are secondary in explaining what happens to different nation states. Culture is a nebulous concept that is impossible to measure with any precision and thus does not fit readily into economic discussions. But the same can be said for the notion of institutions at the basis of Acemoglu and Robinson's argument.

One of the changes that opened up the economic system of the U.S. was the reforming of laws of incorporation that took place before the Civil War. Originally the granting of corporate charters was tightly controlled by the political process, creating the temptation to create economic rents. The reform of the process took politics out of the process, allowing anyone meeting a set of requirements to get a corporate charter. This change removed a major hurdle in organizing large businesses, and Acemoglu and Robinson completely ignore this development even though it fits into their narrative. (A book with a similar emphasis on the importance of institutions, Political Institutions and Financial Development, edited by Stephen Haber, Douglass C. North, and Barry R. Weingast, has a paper that notes that between 1842 and 1852 eleven states rewrote their constitutions to take the power of chartering corporations out of politics.)

Instead they highlight the anti-trust attack on the so-called robber barons of the late 19th century as a victory for inclusive institutions. They seem unaware that the pejorative term "robber baron" was popularized not in the 19th century but only in the 1930s or that the "monopolists" owned much of their success to exploiting the economies of scale that new technologies brought. The people who most objected to the so-called robber barons were not those who bought from them but those who could not compete with them, the rivals who were the victims of the creative destruction that the Carnegies and Rockefellers of the era unleashed.

Chapter 11 concludes with a section called, "Positive Feedback and Virtuous Cycles." Chapter 12 concludes with a section called "Negative Feedback and Vicious Cycles." Economists do not give the concept of feedback nearly enough emphasis, so perhaps the authors were unaware of what the definitions of positive and negative feedback are. Positive feedback tends to amplifying results while negative feedback dampens or stabilizes things. Hence, both vicious cycles and virtuous cycles result from positive feedback. The authors could have argued that negative feedback creates a stagnation or poverty trap, but a trap is not the same thing as a vicious cycle.

Acemoglu and Robinson give Venice as an example of a state that developed an inclusionary institution, the commenda, which set it on the road to growth and prosperity in ninth and tenth centuries. The commenda was a risk sharing agreement for trade missions that gave ambitious and talented outsiders a chance to prosper. Eventually, early in the 14th century, the elites chose stagnation by closing avenues of upward mobility. Although stagnation and decay are possible paths for today's developed nations, no attention is given to this topic. The omission may be because Acemoglu and Robinson are focused on why so many nations have failed to develop economically, and decay is best left for a different book (though they include one such book, Mancur Olson's The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, in the bibliography). Or perhaps they do not consider decline an important threat; their emphasis on the virtuous cycle of inclusive institutions supports this possibility.

One of the concepts that Acemoglu and Robinson stress is "contingent events," episodes that can break a pattern and send a nation down a path to different institutions. They repeatedly refer to the Glorious Revolution of 1688 as the event that changed the trajectory for England, leading to a process that generated ever more inclusive institutions. In the post-World-War-II era the world underwent massive decolonization, which provided a host of contingent events sending countries on new paths. In almost all of these cases the new regimes made their institutions more exclusive rather than more inclusive, further impoverishing their countries. Acemoglu and Robinson blame the exclusionary institutions that the colonizers left behind for today's poverty in Africa, Asia, and the Americas. What they do not explain is why independence led to more exclusionary institutions rather than more inclusionary institutions.

On page 389 they write, "It is impossible to understand many of the poorest regions of the world at the end of the twentieth century without understanding the new absolutism of the twentieth century: communism." The irony of communism and socialism is that although their rhetoric about equality suggests that they will usher in inclusive institutions, the nature of socialism requires that it be highly exclusionary. Acemoglu and Robinson spend few pages developing this idea despite their declaration of its importance.

In the final chapter Acemoglu and Robinson look at foreign aid and come to the same conclusion that William Easterly found, that it can often be counterproductive, reinforcing the power of the elites to maintain the status quo. However, they conclude that foreign aid is here to stay not because it is effective but because "many Western nations feel guilt and unease about the economic and humanitarian disasters around the world, foreign aid makes them believe that something is being done to combat the problems." (p 454) They also make the case that though China has been growing rapidly for the past few decades, that growth will soon slow down dramatically. They argue that some growth is possible under extractive institutions, and point to the USSR as an example. By massively investing in technology that had been developed by others, the USSR grew rapidly until the 1970s. At that point it had exploited what was possible with that strategy. For growth to continue, they would have had to allow creative destruction, but authoritarian and totalitarian regimes abhor creative destruction. Acemoglu and Robinson see the same process playing out in China. There is no rule of law, property rights are insecure, and the political trumps the economic. What is possible given their institutions is limited.

Acemoglu and Robinson end the book with a story from Peru where Fujimori and his crew tried to ensure their dominance. They paid off various officials and judges, but the really big payments were to the press. They recognized the key to control was control of the press--nothing else really mattered much. If Acemoglu and Robinson had not dismissed culture as unimportant, perhaps they might have played with the importance of the media in shaping culture, which in turn can limit what elites can do in the political sphere.

Update: Here is William Easterly's review of the book in the Wall Street Journal.

Incentives and tricks

"But what Sunstein and Thaler say is that it's just easier to trick people than it is to change their incentives.... [M]y toolkit used to contain only incentives, but now tricks are in there, too."
Steven D Levitt, from an interview in Simon W, Bowmaker, The Art and Practice of Economics Research: Lessons from Leading Minds (Edward Elgar, 2012 ISBN: 978 1849808460) p. 237

Behavioral economics and the psychologists who inspired it may have introduced ways of tricking people into intellectual discourse but it is doubtful that they are discovering anything that has not been practiced by hucksters for generations. Their analysis of weaknesses in the ways people choose can be used in two ways.

First, it can help people manipulate others--to trick or nudge them. This can benefit those who are tricked if, as Levitt, Thaler, and Sunstein assume, the tricker is a benevolent paternalist preventing mistakes by an error-prone citizen or underling. Those who assume that even people in government are usually self-interested fear that the benefitting party will not be the one tricked, but rather the one who tricks. They worry that power combined with this knowledge creates temptation for abuse.

The second way to use the analysis of behavioral economics is not through manipulation but rather as a defense against manipulation.  If one understands the errors to which human decision-making is prone and how those errors can be exploited by others, one can attempt to correct for those errors and is less likely to be exploited.

Thaler and Sunstein do not use the word "trick." Instead they talk about "nudges," ways of framing choices so that people are more likely to make what Thaler and Sunstein consider good choices. Levitt has re-framed their message by using the word "trick," and their approach seems less desirable when it is seen as tricking people rather an as nudging them. Can the government of free and equal people be based on deception?

(Behavioral economics can be used to attack the notion of market efficiency. If people cannot be trusted to make rational choices, why should we want a system to responds to people's wants as markets tend to do? However, behavioral economics can just as easily be used to attack the underpinnings of democracy. If people can be easily tricked, why should we expect their political choices to result in good government? With or without behavioral economics, it is hard to make a convincing case that political processes have a greater tendency to self-correct than market processes.)

People respond to incentives

Life on the dole in Britain.

Bank failure and the financial crisis

From a book review on the financial crisis:

•When the FDIC took over Washington Mutual, it paid uninsured depositors in full using money that would have gone to bondholders. Writes Mr. Allison: "This was in complete contradiction to past practice. The bondholders suddenly realized that there is no rule of law when government regulators are involved…The decision to treat WaMu bondholders this way closed the capital markets for banks."

Another review here.

Common problems in government

An excerpt from a longer post by Jonathan Adler.

One thing that Hardin overlooked is that the political process often replicates the same economic dynamic that encourages the tragedy of the commons -- a dynamic fostered by the ability to capture concentrated benefits while dispersing the costs. Like the herder who has an incentive to put out yet one more animal to graze, each interest group has every incentive to seek special benefits through the political process, while dispersing the costs of providing those benefits to the public at large. Just as no herder has adequate incentive to withhold from grazing one more animal, no interest group has adequate incentive to forego its turn to obtain concentrated benefits at public expense. No interest group has adequate incentive to put the interests of the whole ahead of the interests of the few. The logic of collective action discourages investments in sound public policy just as it discourages investments in sound ecological stewardship. This, in addition to the pervasiveness of special-interest rent seeking, explains many of the failings of centralized regulation.

Why Nations Fail

From the New York Times Magazine, a piece on a book by two economists, Daron Acemoglu and James Robinson

According to Acemoglu’s thesis, when a nation’s institutions prevent the poor from profiting from their work, no amount of disease eradication, good economic advice or foreign aid seems to help. I observed this firsthand when I visited a group of Haitian mango farmers a few years ago. Each farmer had no more than one or two mango trees, even though their land lay along a river that could irrigate their fields and support hundreds of trees. So why didn’t they install irrigation pipes? …. But these farmers also knew that nobody in their village had clear title to the land they farmed. If they suddenly grew a few hundred mango trees, it was likely that a well-connected member of the elite would show up and claim their land and its spoils. What was the point?

If national institutions give even their poorest and least educated citizens some shot at improving their own lives — through property rights, a reliable judicial system or access to markets — those citizens will do what it takes to make themselves and their country richer.

Read the whole thing--it is worth the time.

The book that prompted the article is Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

The book seems to agree with Hernando de Soto, who made a similar argument about economic development in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. I suspect that their arguments about economic decline share a lot with Mancur Olson's The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities.

(Also on the topic of property rights, I see a lot of buzz for the movie The Lorax. I doubt if more than one person in a thousand who reads the original book or watches the movie will think, "The problems here is poorly defined property-rights. If someone owned the trees, that person would speak for the trees." To understand the problem, one must know a bit about economics, a type of knowledge that is rare.)

Update: William Easterly reviews the book for the Wall Street Journal here.

 Update 2: Francis Fukuyama eviews it here He likes it, but has reservations. A couple quotes:

If growth is a byproduct not just of good policies like trade liberalization, which can in theory be turned on like a light switch, but rather of basic institutions, then the prospects of foreign aid look dim. ... Bad institutions exist because it is in the interests of powerful political forces within the poor country itself to keep things this way.

The price of sex

From "Cheap Dates" in the New York Post:

“Every sex act is part of a ‘pricing’ of sex for subsequent relationships,” Regnerus said. “If sex has been very easy to get for a particular young man for many years and over the course of multiple relationships, what would eventually prompt him to pay a lot for it in the future -- that is, committing to marry?”
....
So, what can women do to return the balance of sexual power in their favor? Stop putting out, experts say. If women collectively decided to cross their legs, the price of sex would soar and women would regain control of the market. Like a whoopie cartel.
....
“Let’s be realistic: It’s not going to happen here,” Regnerus says. “Women don’t really need men and marriage -- economically, socially, and culturally -- like they once did. What I hear in interviews with women is plenty of complaining about men or about the dating scene, but their annoyance is seldom directed at other women.”

There is a prisoner's dilemma problem involved--what looks good to the individual may not be good for the group. Plus it is arguable that the end effect of the women's liberation movement of the 1960s and 70s may have been to make many women worse off, not better.

A ranting Brit

A bit of an impressive rant from England:

Now we know why they don’t call themselves ‘police forces’ any more. But they aren’t ‘services’ either, for they certainly don’t serve us or do what we want them to do, preferring to arrest us for defending ourselves. The criminals, who are cunning without being intelligent, all know this.

Read more: http://www.dailymail.co.uk/news/article-2025695/UK-riots-Police-water-cannon-plastic-bullets-After-50-years-lavish-welfare-state-earth-What-abject-failure-says-Peter-Hitchens.html#ixzz1V6Erdk8v

Responding to incentives

People respond to taxes, specifically a tax on Internet activity:

"In the meantime, CouponCabin is actively exploring moving to Indiana. It's a shame we have to consider leaving our longtime home in Illinois, but we will do what is best for our business."

What is wrong with Greece?

Greece is plagued with regulations that were designed to protect special interests, according to this article in the New York Times. The result is an economy that discourages entrepreneurship.

The Greek economy is riddled with distortions — the number of trucking licenses has remained unchanged in Greece since 1971, for example, and the country is among the world’s leaders in lawyers per capita. It has one lawyer for every 250 people, compared with about one for 272 in the United States.

Is the ratio of lawyers to population a rough measure of the amount of rent-seeking a society has?

Perceptions and incentives

Economists believe that incentives matter, but does the New York Times? When the paper recently ran a sensationalist article on child abuse and the Catholic Church, it did not think it worth mentioning that a major source for the article, an attorney, had been party to 1500 lawsuits against the Catholic Church. When the paper was challenged on their report, the editors doubled down and said the background of the source did not affect the story, that the issue was a red herring. My guess is that people would have reacted very differently to the story if it had given the background of its source, and that the people involved at the Times understand that. Because their source benefits when the Church gets bad publicity, he has an incentive to present only information and spin that puts the Church in a bad light.

Economists believe that people respond to incentives. The media seem to believe that perceptions are more important than reality. Both can be right.

Moral Hazard

Paul Krugman, Nobel Prize winner, seems to have forgotten what moral hazard is.

Taxes in New Jersey

People respond to incentives:

Several years ago, he recalled, one of his clients stood to make $60 million from stock options in a company that was being acquired by another. Before he cashed out, however, the client put his home up for sale, moved to Las Vegas, and “never stepped foot back in New Jersey again,” Hydock said.
“He avoided paying about $6 million in taxes,” he said. “He passed away two years later and also saved a huge estate tax, so he probably saved $7 million.”

The above quotation is from an article at nj.com, looking at studies showing that the high tax rates in New Jersey are encouraging wealthy people and people with high incomes to move.

Greece

About Greece, From National Review's Corner:

I asked him why he didn't hire more help, since his hotel wasn't all that small and he seemed to be going 24/7. What followed was a harangue about the cost of hiring a permanent worker in Greece, the difficulty of ever firing him if he proved worthless, and why he preferred to do everything himself rather than fill out all sorts of forms and hire unmotivated but tenured employees. Besides, he said, almost everyone was on some sort of pension, disability, or government benefit, and was unwilling to work, so his choices were either illegal immigrants or broke foreign students. Then he launched into a blast against socialism, and explained how he was forced to become an expert tax dodger, how he would barter for all the transactions he could, and why he hated the government. He finished by sighing that in Greece, the people spend their time either devising ways to get government money or scheming to avoid the tax collectors — or, preferably, both.

It has taken a while, but the future of Greece does not look promising.